Summary

Corporate Governance Summary

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Course
Corporate Governance

Institution
Universiteit Twente (UT)

Complete summary for the course 'Corporate Governance'. This summary includes the lectures as well as the chapters from the book 'Corporate Governance', specific for this module and course. With this summary, I received an 8.5 in the exam.

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Uploaded on December 12, 2020
Number of pages 11
Written in 2019/2020
Type Summary

corporate governance
goverance

Institution
Universiteit Twente (UT)
Education
International Business Administration
Course
Corporate Governance

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3. Summary - Business ethics summary
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Lecture 1 – Corporate Governance

What is corporate governance?
- Deals with the relationships among various participants in determining the directions
and performance of corporations
- The system by which companies are directed and controlled
- Deals with the ways in which suppliers of finance to corporations assure themselves of
getting a return on their investment
- What corporate governance is not:
o Not about management, but about the control and direction of managers
o Not just regulation/code
o Not a faith/belief

Why corporate governance?
- Better corporate performance, economic efficiency and social welfare
- Ensure good decision making: good management, good investments
- Create checks & balances and prevent abuse of power
- Diminish corporate failures & scandals
- Better access to finance, lower cost of capital

How does governance take place – Corporate governance mechanisms
- Internal (firm-oriented)
o Ownership structure
o Board structure
o Compensation structure
- External (market-oriented)
o Capital market / Analysts, Auditors
o Takeover market
o Debt market / Creditors
o Product market / Competitors
o Labor market
o Regulation
- In addition to these formal mechanisms, some informal governance mechanisms also
exist:
o Codes
o Social norms
o Reputation & trust

Theories related to corporate governance
- Agency Theory

1

, o Organizations are characterized by one party, the principal, delegating work to
another party, the agent
o In context of a corporation:
 Owners (principal) hire managers (agent) to run the firm in exchange for
an agreed compensation
o Parties join to do business but have conflicting interests: potential risk of
managers acting in their own interest at the expense of the owners
 Agency problems arise
o Conflict of interest becomes important because only one party bears the cost
o Owners therefore need to:
 Monitor the managers
 Find ways to align interests
o Since a corporation has stakeholders other than just owners and managers,
different types of agency problems arise
- Information asymmetry theory
o Agency theory cannot alone explain human behavior
o Owners and managers experience asymmetric information between them
o It creates two types of information problems:
 Adverse selection (i.e. hidden knowledge)
 Owner know less about the capabilities of a manager who knows
herself more
 Occurs before the principal takes the decision, i.e. employ the
manager  wrong managers might be selected
 Partly solved through screening or monitoring incoming applicants
 Moral hazard (i.e. hidden action)
 Activity of managers cannot be observed by owners
 Occurs after the decision, i.e. manager is employed
 Managers can be given incentives to share some of shareholders
risks
- Stakeholder theory
o Takes account of a wider group of constituents rather than focusing on
shareholders
 Focus usually on shareholders based on interest in resources being used
to maximum effect; should benefit society as a whole
o Stakeholder – any individual or group on which the activities of the company
have an impact  unclear protection of their rights
o Shareholder – entity that owns shares in a company  rights protected by law
 Can be part of the stakeholders
o Stakeholders (apart from shareholders) include:
 Employees
 Interest in company – provide their livelihood
 Concerned with pay/working conditions
 Customers

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